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Are the salary and wages received from the United Kingdom (UK) Government by an Australian resident assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages received from the UK Government by an Australian resident are not assessable income under subsection 6-5(2) of the ITAA 1997 as they are taxable only in the UK under Article 18(1) of Schedule 1 to the International Tax Agreements Act 1953 (the Agreements Act).

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is employed by the UK Government as a naval officer operating in UK territorial waters.

The taxpayer has been engaged in foreign service for a continuous period of not less than 91 days.

The taxpayer receives salary and wages from the UK Government.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that, where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed.

One of the listed reasons is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the UK (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

Article 18(1) of the 2003 UK Convention provides that salary and wages paid by the UK Government to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in the UK. However, salary and wages shall be taxable only in Australia if the services are rendered in Australia and the recipient is a resident of Australia who: (a) is a national of Australia; or (b) did not become a resident of Australia solely for the purpose of rendering the services.

The taxpayer is employed and paid by the UK Government as a naval officer operating in UK territorial waters. Therefore the salary and wages shall be taxable only in the UK.

Accordingly, the salary and wages received from the UK Government are not assessable income under subsection 6-5(2) of the ITAA 1997.